S&P lowers RJ Reynolds outlook

Standard & Poor's revised its outlook on RJ Reynolds Tobacco Holdings Inc. to negative from stable and confirmed its existing ratings including its senior unsecured debt at BB+ and the senior unsecured debt not guaranteed by material operating subsidiaries including RJ Reynolds Tobacco Co. at BB.

S&P said the revision reflects its assessment of the U.S. tobacco industry environment and RJR's competitive position.

Last week, RJR reported its second-quarter earnings, which included a 47% decline in operating earnings before $55 million of restructuring charges. Although S&P said it had anticipated a weak second quarter for RJR, industry conditions do not appear to be improving. Recent earnings releases from other industry participants indicate that promotional and discounting activity is still at high levels, and it is unclear when this trend will begin to reverse.

In addition, RJR expects to announce a significant restructuring charge in the September/October time period as part of an ongoing review of its business strategy and cost structure, S&P noted. It is uncertain as to how quickly any recommendations or changes to RJR's business can be implemented in order to stem further erosion of volume and operating profit.

The ratings on RJR and related entities are based on the company's No. 2 position in the declining domestic tobacco market, its declining brand volume and market share, weakened competitive position and significant uncertainties about future domestic operating performance and pricing strategies, S&P said. Furthermore, the U.S. tobacco industry continues to face significant litigation challenges. These factors are somewhat mitigated by the firm's strong financial condition and conservative financial policies.

In the first six months of 2003, RJR's shipment volume declined by 12.5%, while the company estimates retail consumption of its brands dropped by about 8%-10%. Operating income declined by about 50% and RJR management expects that operating income could decline by about 50% for the full-year 2003 from previous year levels, S&P said. This decline will result in estimated EBITDA coverage of interest of just over 6x in 2003. To maintain its rating, S&P expects RJR to sustain its cash flow coverage measures at these reduced levels.

S&P takes Pilgrim's Pride off watch, rates notes BB-

Standard & Poor's confirmed Pilgrim's Pride Corp. ratings including its bank debt and senior secured notes at BB, senior unsecured notes at BB- and subordinated notes at B+, removed it from CreditWatch negative and assigned a BB- rating to its planned $100 million senior unsecured notes due 2011. The outlook is negative.

S&P said the ratings incorporate its expectations that Pilgrim's Pride's credit protection measures will weaken following the proposed partially-debt financed acquisition of ConAgra's fresh chicken division for $615 million.

Pilgrim's Pride is currently the third-largest player in the commodity-based U.S. chicken industry, and the second-largest fresh chicken company in Mexico. The ConAgra acquisition, however, will make it the second-largest U.S. player, with revenues of about $5 billion, behind Tyson Foods Inc.

The acquisition will also provide Pilgrim's with broader national distribution and additional raw materials to expand its value-added strategy.

Despite the inherent volatility of the commodity-based U.S. chicken industry (results are affected by several factors outside of the firm's control including weather, protein supply, disease, etc.) the ConAgra acquisition will diversify Pilgrim's U.S. geographic distribution capabilities and provide it with an adequate supply of raw materials for its higher margined, value-added programs over time, S&P said. Moreover, in connection with the transaction, Pilgrim's Pride will also become a preferred supplier of chicken products to ConAgra.

Still, the company's financial profile has weakened. Operating margins during fiscal 2002 and in the first half of 2003 were hurt by avian influenza, which affected the company's turkey flock on the East Coast. Other pressures on the operating margins were the listeria outbreak in the Northeast and overall depressed poultry prices. Moreover, these margins are likely to remain below historical levels in the near-term after the acquisition of the ConAgra business, which has a greater commodity orientation and lower operating margins.

Pro forma for the acquisition, operating lease-adjusted total debt to EBITDA for fiscal 2003 is expected to be about 4.0x, while operating EBITDA to interest is expected to be slightly below 3.0x, S&P said.

Moody's cuts Pilgrim's Pride

Moody's Investors Service downgraded Pilgrim's Pride Corp. including cutting its $200 million 9.625% senior unsecured notes due 2011 to B1 from Ba3. The outlook is stable.

Moody's said the downgrade reflects incremental leverage relative to the cash flow associated with the company's previously announced prospective acquisition of ConAgra's chicken business, integration challenges in almost doubling the company's scale and risk in projecting run-rate operating performance for the acquired business, which has not been operated as a stand-alone business and has experienced earnings weakness.

Pilgrim's leverage has remained high due to chicken market weakness in fiscal 2002 ending in September 2002, flock disease in fiscal 2002 and a product recall in fiscal 2003, which delayed debt reduction after the company's $285 million debt-funded acquisition of WLR Foods in January 2001.

Material debt reduction is not expected over the near term following the ConAgra acquisition.

The ConAgra transaction entails integration of a large complex operation into Pilgrim's existing business platform and realization of synergies to reduce leverage. The ConAgra chicken business had significant intercompany sales and was not operated on a stand-alone basis, introducing some uncertainty in projecting earnings and cash flow. Earnings have been volatile and operating margins lower than Pilgrim's Pride.

The stable outlook assumes ConAgra's run-rate operating performance is not materially different from expectations and cost savings and synergies are largely achieved, Moody's noted.

The incremental debt to be used to pay for the ConAgra acquisition represents somewhat higher leverage (5.1x ConAgra's year-end 2003 EBITDA) than Pilgrim's Pride's trailing 12 months debt/EBITDA of 4x. With heavy capital spending ($125 million), pro forma free operating cash flow after capex (but before working capital) is expected to be modest over the near term.

S&P rates Day International's loan B

Standard & Poor's rated Day International Group Inc.'s proposed $187 million senior secured credit facilities due in 2009 at B. Furthermore, S&P lowered its rating on Day's 12¼% preferred stock due 2010 to D from CCC following nonpayment of the cash dividend. The company was restricted from making the cash payment under its current bank agreement and note indentures. The outlook was revised to stable from negative.

The new facility consists of a $32 million five-year delayed-draw term loan, a $30 million six-year term loan A, a $105 million six-year term loan B and a $20 million five-year revolver. Security is a perfected first-priority interest in all of the company's tangible and intangible assets. Proceeds from the loan will be used to repurchase the company's $100 million 11 1/8% senior unsecured notes due 2005, to repay debt under the current credit facility and to fund a potential acquisition.

The new credit facility will have an early maturity of Sept. 15, 2007, in the event that the 9½% senior subordinated notes due in March 2008 are not refinanced by then.

Ratings reflect the company's good market position. Somewhat offsetting this is the company's aggressive financial profile and limited financial flexibility, S&P said.

The change in outlook reflects the modest improvement in operations, reduced interest cost and loan amortization, and elimination of refinancing risk as a result of the refinancing.

Currently, EBITDA interest coverage is about 2x and total debt to EBITDA was 4.5x at June 30. Over time, total debt to EBITDA should average about 4x to 5x and EBITDA interest coverage should average around 3x, S&P said.

Moody's rates Day International's loan B1, lowers notes, preference stock ratings

Moody's Investors Service rated Day International Group Inc.'s proposed $187 million senior secured credit facility due 2009 at B1. Furthermore, Moody's downgraded the $114.7 million issue of 9.5% guaranteed senior subordinated notes Series B due 2005 to Caa1 from B3 and the $62.6 million issue of 12.25% senior exchangeable preference stock due 2010 to Caa3 from Caa1. The outlook was changed to negative from stable.

The facility consists of a $20 million revolver due 2008, a $32 million delayed draw amortizing term loan A due 2008 and a $135 million minimally amortizing term loan B due 2009, according to Moody's. Security on the loan is a first priority lien on all existing and future domestic assets as well as a pledge of 65% of the stock of the foreign subsidiaries. Proceeds from the credit facility will be used to refinance the existing bank debt and the $100 million issue of 11.125% senior notes due 2005, and for general corporate purposes. The proposed refinancing will benefit the company by improving liquidity, lowering interest expense and extending debt maturities.

The downgrade of existing ratings on the subordinated notes and the exchangeable preferred reflects their deepening subordination to the larger senior secured facility as well as the lack of prohibition on the issuance of future senior unsecured notes.

Ratings reflect the company's weak balance sheet with high financial leverage at 140% of book capitalization, a high multiple of debt plus preferred to sales of 1.3 times, intangibles at 45.8% of total assets and a modest pro forma fixed charge coverage. Further constraining the ratings is the company's acquisition growth strategy, customer concentration, the high percentage of sales and assets at non-guarantor subsidiaries, and exposure to the cyclical printing industry and the consolidating yarn industry, Moody's said.

Ratings are supported by the company's leading global market shares in both consumable image transfer products and textile products, improved profitability and return on assets as a result of the restructuring initiative of fiscal year 2001 to 2002 and history of moderate free cash flow generation, Moody's added.

The negative outlook reflects concern over the company's ability to increase its level of free cash generation to significantly reduce the higher pro forma leverage as well as the significant accretion of leverage generated by the preferred stock issues which mature in 2010.

For the trailing 12 months ending June 30, total debt to EBITDA was 4.6 times, free cash flow as a percentage of total debt was 5.1%, or 3.3% inclusive of the convertible preferred stock and interest coverage was 1.5 times on and EBIT basis.

Moody's cuts TSI outlook

Moody's Investors Service lowered its outlook on TSI Telecommunication Services, Inc. to negative from stable and confirmed its ratings including its $226 million senior secured term loans and $35 million senior secured revolving credit facility at Ba3 and $245 million 12.75% senior subordinated notes due 2009 at B3.

Moody's said the negative outlook reflects its concern that TSI's revenues and cash flow have declined while capital expenditure requirements are modestly increasing.

Moody's noted that quarterly EBITDA has declined 12% in the first quarter of 2003 and 13% in the second quarter when compared to the same quarters in the previous year.

TSI management recently reduced full year EBITDA guidance to between $95 to $105 million which is approximately 20% below 2002 results. Capital expenditures for 2003 are now expected to be around $18 million, up from earlier guidance of $11 million. This increase is largely tied to the contractual commitments in implementing Wireless Local Number Portability services for its customers. TSI raised

its revenue expectations in 2004 to $35-$45 million for its WLNP services.

Moody's expects that TSI will continue to generate meaningful amounts of free cash flow (defined as cash provided by operations less capital expenditures) to comfortably cover its debt service obligations including upcoming scheduled principal amortization payments. In 2004, quarterly term loan amortization increases to $8.75 million up from $5 million per quarter currently.

Nonetheless, as TSI has not met Moody's previous expectations for revenue and cash flow growth and is now increasing its capital spending plans, Moody's is concerned that cash flow growth may continue to disappoint. TSI may also require an amendment to its secured credit agreement to achieve covenant relief, although Moody's expects that secured lenders are likely to be accommodative.

S&P lowers Radnor outlook

Standard & Poor's lowered its outlook on Radnor Holdings Corp. to negative from stable and confirmed its ratings including its senior unsecured debt at B.

S&P said the outlook revision is a result of the company's significantly weaker-than-expected financial performance in the second quarter of 2003, which has eroded the company's liquidity position.

The outlook revision highlights the risk of a downgrade sometime this year given Radnor's disappointing second-quarter operating results and weaker than expected operating trend for the rest of 2003, S&P said.

The weak operating results were the result of the company's inability to fully recoup higher raw material costs (styrene monomer) from customers, volume declines in the packaging segment, and the impact of higher natural gas costs. As a result, the company reported an operating loss (before taxes) of about $6 million in the second quarter of 2003, compared to an operating profit of about $3 million in the same quarter for the year before. Weak cash flows, reduced availability under its revolving credit facility, and a deterioration in the company's credit measures also necessitated an amendment to its credit agreement to loosen financial covenants.

The ratings reflect Radnor's very aggressive financial leverage, weaker-than-expected financial flexibility, and its narrow scope of operations, which overshadow its below-average business profile, S&P said.

Following the steep increase in prices of styrene monomer in March and April 2003, the company was unable to fully pass-through higher raw material costs to customers in the packaging and expanded polystyrene resin (due to a relatively higher level of expanded polystyrene resin imports by customers) segments.

Radnor is highly leveraged, and credit measures have deteriorated with total debt (adjusted for capitalized operating leases) to EBITDA of over 6x for the 12-month period ended June 30, 2003, from about 4.7x at March 31, 2003, S&P said. Following improved operating profits in 2002, credit measures are subordinated par and well below appropriate levels of total adjusted debt to EBITDA of about 5x and EBITDA to interest coverage of 2x.

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